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Brigitte Yuille

Reviews have been mixed for the credit counseling sessions required under
the new bankruptcy law that took effect in the fall of 2005.
Supporters say the counseling sessions are doing what the Bankruptcy Abuse
Prevention and Consumer Protection Act of 2005 intended -- putting more
information into consumers' hands.

"At this point it is too early to tell all of the outcomes that will evolve
from this provision," says Steve Bartlett, president and CEO of the
Financial Services Roundtable, a trade association of consumer credit and
finance companies. "But we are confident that through the counseling
process, consumers will better understand all their options for getting
their financial house in order."

Consumer advocates charge that the sessions are often a waste of time and
money they liken to traffic school. They say:
The sessions are a hodgepodge, with services spread unevenly across the
country. In many places, only telephone and Internet sessions are available.

The fee structure is still unclear. The law allows credit counselors to
charge a "reasonable" fee. The Department of Justice's U.S. Trustee Program,
which enforces bankruptcy laws, has said it expects the fees to be from free
to $50 but has not established any guidelines.
Counselors occasionally cross the line into improperly giving legal advice.

"Congress has created a layer to charge a consumer $50 for a joke," says
bankruptcy attorney Larry Feinstein of Vortman and Feinstein in Seattle.
"There's no real credit counseling."

The new law makes it much tougher to file for bankruptcy. One provision
requires debtors to get credit counseling before they can file for a Chapter
7 or Chapter 13 bankruptcy. In addition, the debtors must go through another
credit counseling session before their debts can be discharged. The
counseling can be delivered in person, over the phone or on the Internet.

During the pre-filing consultation, a certified consumer credit counselor
discusses how the debtor landed in the financial hole and provides the
debtor with a budget analysis and possibly a debt-repayment plan. This
session, which should be 90 minutes long, has consumers review all their
options before making the leap to bankruptcy. Consumers can expect to pay
about $50 for this requirement.

The second session, required before the final discharge of debts, is a
two-hour personal financial management course. In this session, debtors will
be instructed on budget development, money management and the wise use of
credit and consumer financial resources. It also will cost about $50.
Records show that slightly more than 38,000 people filed for bankruptcy
between Oct. 17, when the new law went into effect, and the end of the year,
making them, and all subsequent filers, subject to the counseling sessions.

To assess the effect of the sessions, Bankrate spoke to bankruptcy experts,
financial industry experts and counselors, and attended counseling sessions.

The counselors' view

Counselors say they're doing their best in a new system to give
sometimes-nervous clients a new window on their finances.
"We try to make it pleasant and nonthreatening," says Dee Anne Chandler,
education director at Springboard Nonprofit Consumer Credit Management Inc.,
in Riverside, Calif.

"Some take advantage of having the interaction with a counselor and some do
not," she says. "They say it was less threatening than they originally
thought. They weren't left to feel as if it was their fault and that their
financial troubles were caused by their own actions."
Sonya Bryant, certified credit counselor for Consumer Credit Counseling
Service in Boca Raton, Fla., describes her bankruptcy clients as hesitant.

"A lot of times you have to draw information out of them," she says.

Distant counselors

Critics say effective counseling requires far more time and communication
than a telephone or computer session can give. Feinstein notes that as of
mid-December, approved credit counseling agencies were not available in
Seattle. Therefore debtors had to either contact 800 numbers or go online,
which he says a majority of his clients have done.

"I've had people in my office go into my secretary's cubby and go online
there and go through the session. I've watched in the background. Consumers
go through a questionnaire online, and there's no one-on-one feedback."

Agencies approved to give counseling in his area are in Texas, California,
Georgia and Virginia.

"The counselors know nothing about Seattle," he says. "They don't know the
housing costs because they are 3,000 miles away."

He says real counseling involves bringing in bills, important documents, pay
stubs and tax returns, and sitting down with a counselor to thoroughly
manage affairs.

Congress created the new law to convince consumers that "it's just not worth
going through the hassle of filing for bankruptcy," says Feinstein.
He concedes he has yet to see how the post-filing credit counseling also
required by the new law will work. He said he hopes that the government will
do a study within the next couple of years to determine if it should expand
the requirements needed to get the certificate.

"We are too new in the system to see clients go through the personal
financial education course," Feinstein says. "Maybe that one's better. Maybe
it's more substantive. The first one to me is a joke."

Consumer bankruptcy attorney and Bankrate columnist Justin Harelik agrees
that bankruptcy counseling needs to be more hands-on.
"It needs to address the psychological and emotional issues on how the debt
was incurred and how people spend money," says Harelik.
Some attorneys say they are pleased with the services they've used.

"Many of my clients are not computer-literate, and are therefore
uncomfortable completing the classes online," says bankruptcy attorney
Deirdre Sullivan of Kagen, MacDonald & France P.C. in York, Pa. "The
Institute for Financial Literacy was willing to conduct their counseling via
telephone instead. The clients who are computer-literate found the classes
easy to complete.

"I like that their Web site allows me to enter the client's basic
information and then their site generates an e-mail to my client, which
includes a link to the Institute's Web site, which takes the client right
where they need to go."

Additional requirements

The pre-filing session has been described as the ticket into bankruptcy,
while the post-filing credit counseling is the ticket out. But in either
case, the bankruptcy courts must have proof. Consumers will have to present
a certificate from the credit counseling agency when they submit their
bankruptcy paperwork to be filed and from the personal financial management
course provider before their debts are discharged.
Debtors incapacitated, disabled or on active military duty in a military
combat zone, as defined by law and the courts, will not have to participate
in either counseling course.

The court can waive the counseling requirements if, upon application to the
court, the debtor can show a need for urgency and that he or she was not
able to obtain counseling within five days of the initial request. If the
debtor is granted the waiver, he or she must be counseled within 30 days of
the filing, 45 days in special circumstances, or the case will be dropped.

Credit counseling agencies that want to offer bankruptcy counseling are
required to be nonprofit, meet bonding requirements if they handle clients'
funds through debt management plans, charge a reasonable fee, and provide
adequate counseling by trained counselors without regard to ability to pay,
according to the U.S. Trustee Program.

While the nonprofit status is a criterion for approval as a credit
counseling agency, it isn't necessary for approval to be a personal
financial management education course provider.

Determining costs

Questions about the costs of counseling continue to arise. The law says that
agencies must charge a reasonable fee and counseling must take place
regardless of ability to pay. However, a fee has not been set by the U.S.
Trustees.

"Various recommendations and concepts are under consideration," says Jane
Limprecht, a spokeswoman for the U.S. Trustees in Washington, D.C.

Consumer advocates claim that some agencies have not told debtors they could
waive the fee. Advocates believe this may cause some consumers to
"needlessly" be delayed or inhibit them from the counseling and bankruptcy
altogether.

They are also concerned that agencies may only encourage those who have the
ability to pay the fee to seek counseling.

The advocates have asked the U.S. Trustees to make sure all approved
agencies make consumers aware that fees may be reduced or waived on their
Web sites and when the consumer initially contacts the agency, and also make
consumers aware, on their Web sites, of distinct criteria for reducing fees
or granting a waiver and the documentation necessary to do so.

The U.S. Trustees "did mention the disclosure of the free counseling," says
Deanne Loonin of the National Consumer Law Center in Boston. But, she says,
the department has not provided guidance as to what the disclosures should
say or who should be getting fee waivers.
However, Limprecht says, the U.S. Trustee program is reminding all providers
of the legislative requirements. She says it is also receiving input from a
number of constituencies on practices, issues and future guidance needs.

Susan Keating, CEO of the National Foundation for Credit Counseling, the
nation's largest and oldest nonprofit credit counseling service, says that
although the U.S. Trustees office has indicated that fees should average $50
at the most, the actual counseling costs are more.
"The cost to deliver a face-to-face 60-minute session averages over $100,"
says Keating. "We are talking about a gap here in the funding. We are all
trying to figure out how to deliver the services within what is intended in
the new law."

"I think we knew this was going to be a problem. This is an unfunded
mandate," says Loonin. "Those who supported this mandate in the first place
over-sold what kind of revenues they were going to get from it. The filing
fees are already extremely high. Even if you charge everybody the reasonable
fee it's not going to cover costs."

And, although the U.S. Trustees office states that it's possible for someone
other than the consumer to pay the fee, Michael McAuliffe, CEO of Family
Credit Counseling Service in Rockford, Ill., finds some relationships a
little unsettling. He says debtors typically find out about the credit
counseling provision when they visit their bankruptcy attorney, and some
consumers are being convinced that they should file bankruptcy when it's not
necessary.

"Bankruptcy attorneys should not have a relationship with the credit
counseling agency," says McAuliffe. "There are cases where the bankruptcy
attorney is putting the pre-filing and/or post-filing fees into their
attorney fee and paying the credit counseling agency direct. This is a
revenue stream for the credit counseling agency. It's a major conflict of
interest."

"Counseling is required to be adequate, and approved agencies are required
to be nonprofit," says Limprecht. She warns "third-party actions that
jeopardize adequacy of counseling services will be investigated and can
place continued approval at risk."

Consumer advocates also claim that some credit counselors are walking a very
fine line when outlining counseling options to pre-filers.
"General information about the strategies is not going to be legal advice,"
says Loonin. "But the more specific you are in advising any particular
strategy to that consumer then the closer you get to the legal-advice line."

Consumer advocates want the government to provide a clear statement to
counselors telling them they must not give bankruptcy advice or engage in
the unauthorized practice of law.

Limprecht says the U.S. Trustees office has responded. "Non-attorneys are
not permitted to provide legal advice, and approved credit counseling
agencies are notified of that fact."

Startup glitches: Supply vs. demand

A number of agencies initially approved by the U.S. Trustees did not offer
the service in person. Some counselors say most clients prefer the anonymity
of the phone and the Internet anyway.

The availability of counseling sparked concerns when the law was enacted.
Advocates pointed out more agencies were being approved for the debtor
education course than the pre-filing credit counseling; options for
receiving the counseling were mostly limited to the telephone or the
Internet with very few agencies offering the briefing in person, and, even
if the person were to visit the counseling agency for a session, they would
have to prepare for a long drive with the agencies few and far between.

Limprecht says the government is trying to fix the problem.

"As of Jan. 1, 2006, U.S. Trustees have approved over 100 credit counseling
agencies and over 150 debtor-education course providers," she says. "In the
judicial districts overseen by the U.S. Trustee program, brick-and-mortar
services are available in all but 10 districts for credit counseling and in
all but 11 districts for debtor education."

The term "brick-and-mortar services" describes companies that have a
physical presence and offer face-to-face experiences as opposed to just the
Internet and telephone.

Ensuring proper counseling

Limprecht says the agencies are approved only after extensive review.

"Staff at the Executive Office for U.S. Trustees, as well as in the field
offices, review the applicant's materials for sufficiency and completeness,
seeking additional information from the applicant if there are questions or
deficiencies," says Limprecht. She says, as of early February, 25
applications for approval as a credit counseling agency had been denied.

In addition, the Internal Revenue Service is also keeping watch. Nonprofit
credit counseling organizations have been under review by the IRS over the
past couple of years.

"The IRS, because it administers the tax-exempt status of these
organizations, and the Federal Trade Commission, because it oversees
consumer issues, announced a joint effort in 2003 to take a hard look at the
tax-exempt agencies," says IRS spokeswoman Nancy Mathis. "Both federal
agencies had received numerous consumer complaints."

A provision in the tax code passed by Congress allows credit counseling
agencies to be exempt from paying income taxes if they provide charitable or
educational programs to their clients, such as an educational program for
low-income people in debt.

Mathis also points out that over the past decade, consumer debt exploded and
tax-exempt credit counseling agencies increased.

"Instead of providing charitable or educational programs, some credit
counseling agencies used high-pressure tactics to obtain exorbitant fees
from their clients and shuffled them off to ineffective debt-management
programs," she says. "There were also issues of the top executives at these
supposedly charitable organizations receiving extremely high salaries."

The IRS began looking at approximately 60 credit counseling agencies.

"At the end of last year, the IRS concluded it should revoke the tax-exempt
status of about 30 agencies," Mathis says. "These 30 represent about half of
the industry's revenue."

Credit counseling agencies have the right to appeal the revocation through
the internal IRS Appeals Office.